Cabinet ministers signed off the error-riddled Novopay system despite advice there were 147 "software defects".

A report, dated June last year, shows there were no problems at the most serious level, but 10 at the next level and 105 at "level 3".

Four independent advisers - from Pricewaterhouse Coopers, the Social Development Ministry, the Primary Industries Ministry and the New Zealand Transport Agency - gave the system - which pays 110,000 staff - the green light. The report said the problems were not "showstoppers".

"Talent2 now has a proven way of rectifying defects and releasing the fixes," the Education Ministry report said.

Final advice given to the trio said 5913 payslip errors were made during testing but that could be reduced to 773 by last June.

By September, teachers were under and over paid - or not paid at all. Five months later the systems is still in chaos.

The documents reveal Talent 2 was experiencing problems with the Novopay system as early as 2010.

Letters and emails released by the Education Ministry today show officials were growing increasingly frustrated by a series of delays in rolling out the complex payroll system for school staff.

A year before the $30 million project "went live", Talent2 asked for extra funding and threatened to "descope" if they didn’t get the cash. A small "goodwill" amount - which has not be released - was paid out. The documents also reveal that 14,470 teachers are still owed $12 million.

Australian firm Talent2 were awarded the contract in 2005.

In March 2010 education deputy secretary Anne Jackson wrote to Talent2’s chief executive warning "significant delays" were "inevitable" and asking for an urgent meeting. She makes reference to a decision to bring forward the "go live" date for North Island schools.

By July it became clear Talent2 had missed a deadline - and wrote to Jackson to acknowledge disappointment.

A year later relations between the Australian firm and the ministry were obviously strained. Talent2 had requested more funding - the amount is withheld - which Jackson said was "not feasible".

She balked at the firms threat to ''descope'': "It is not clear to me why the ministry would agree to this given that Talent2 has been contracted to deliver the existing project scope for an agreed fixed price ... Talent2 has found it more difficult and more expensive to deliver on its contract commitments than it originally estimated, but this does not mean the ministry must accept a higher price or a reduced scope."

By December, Talent2 had failed to meet another deadline and Jackson wrote a strongly worded letter. Talent2 was not meeting its contractual agreements and its "performance requires improvement", she said.

By April, her patience had worn thin - the ministry believed Talent 2 was in "default" failing to make at least four major deadlines - and looked like it was on track to miss more.

She gave Rawlinson two weeks to be ready for testing - otherwise the ministry would activate a "breach" clause in the contract.

Rawlinson bit back - arguing Talent2 was not in breach and "ongoing defects" are "part of the normal project life."

The documents also reveal that the contract has a "contingency" with former Datacom - the previous supplier.

Senior minister Steven Joyce - who has been tasked with fixing the problems - said yesterday he had talks in the last week with Datacom, but Novopay was the easiest solution.

He announced a ministerial inquiry yesterday and extra resources to help schools.

'FIX IT OR DITCH IT'

Education groups have welcomed Government plans to deal with the beleaguered Novopay but want a deadline set for the payroll system to be fixed.

Teachers and principals are expecting major headaches in the next pay round.

Joyce said Novopay would be be scrapped if it could not be fixed, but there were no immediate alternatives.

NZEI president Judith Nowotarski said people had put up with the trouble-prone system for too long.

"They have been paid wrongly, had their third-party payments affected, and this has caused a lot of people a lot of stress," she said.

School administrators and principals had been working long hours to deal with the errors and the Government announcement was cold comfort for those still dealing with Novopay, she said.